Nepotism On Trial

A case now before the Supreme Court of the United States is challenging the notion that business owners can favor members of their own families in hiring and promotion. The high court's ruling could change the way all family-owned or closely held corporations are run.

Although riddled with legal complexities, the case turns on a relatively simple question: whether the shareholders of a family-owned company -- in this case, Oakland Scanvenger Co., an Oakland, Calif., garbage-collection company -- have a legal right to reserve for themselves the most desirable and best-paying positions and restrict the transfer of shares to family members who all happen to be members of a single racial or ethnic group.

"The effect this case can have on small business is tremendous," says K. Peter Stalland, a Minnesota lawyer who represents the National Family Business Council (NFBC), a Chicago-based group. "It means, conceivably, that almost any small business can be sued by an employee of a different ethnic origin than [the owner] or his family members, based upon not being accorded the same treatment as a son or daughter. The precedent is dangerous."

It could begin to alter the way small companies are managed, Stalland explains. The federal antidiscrimination laws under which the case was brought "don't apply to companies with fewer than 15 employees. If the ruling in favor of the employees stands, it might inhibit business growth."

"Family businesses may have to start incorporating more opportunity for advancement among their workers," says Stewart Perry, president of the Cambridge, Mass., based Institute for New Enterprise Development, consultants for community organizations in new venture development. "And entrepreneurs forming a corporation would have to worry about opportunities for equal ownership, not just equal employment."

Oakland Scavenger is one of the country's largest garbage-collecting outfits. Incorporated in 1920 by a close-knit group of Italian immigrants, the transfer of shares has been largely restricted to members of the founding families since the company's inception. Most of the company's 135 or so shareholders are descendants of the founders, and consequently of Italian ancestry. Shareholders have usually been accorded the head driver positions, higher wages, and first crack at overtime. In 1975, a group of black and Hispanic employees sued the company, charging they were being locked out of share ownership and better working conditions because of their race.

The U.S. District Court for the Northern District of California in San Francisco dismissed the complaint, ruling that the antidiscrimination laws did not apply to the situation at Oakland Scavenger. The employees appealed to the U.S. Court of Appeals for the Ninth Circuit, which reversed the district court's decision and explained that "nepotistic concerns cannot supersede the nation's paramount goal of equal economic opportunity for all."

Oakland Scavenger appealed to the U.S. Supreme Court. If the Court agrees to hear the case, and then decides that the antidiscrimination laws apply to the situation at Oakland Scavenger, the case is likely to return to the district court for a trial on whether unlawful discrimination actually occurred.

"For the federal government to tell the legal shareholders of Oakland Scavenger they can't hire and pay their family members the way they want is unreasonable government interference in their constitutional liberty and property rights," insists Stephen McKae, a partner in the Oakland law firm of Moore, Sizoo & Cantwell, attorneys for the company. "What's the advantage of owning a company anyway if you can't bring in your kids?"

But the plaintiffs' argument has been that the constitutional issue of discrimination is more important. As the appellate court explained when ruling in their favor: "We reject the company's argument that its legitimate interest in protecting family members overrides the countervailing national interest in eliminating employment discrimination based on race and national origin."

Smaller companies will bear the brunt of the impact if the Supreme Court upholds the appellate ruling, according to Mary Becker, a University of Chicago law professor and an expert in employment discrimination cases. "The hardest hit will be small businesses and mom-and-pop operations because it is easier to prove widespread discrimination at a smaller organization," she says. "At larger corporations, there tends to be much more shareholder constraint. But a minority employee stuck at a cashier's job in, say, a family-owned grocery store would have an easier time suing for discrimination."

But, in any event, the Supreme Court decision most likely would be only the first step in setting guidelines for action. "Lawsuits will probably follow the decision, as the courts attempt to define and narrow the ruling's interpretation and test its limits," predicts Becker. "The federal government might even step in with some kind of statutory relief."

If Congress gets into the legal fray, the NFBC plans to lobby hard for protective legislation. "We would press ahead in the legislative area," says John Messervey, executive director of the NFBC. "This is clearly one of the gravest threats to family business we've seen in many years. There are at least 2.1 million family businesses in this country that would be affected in some way." One possibility, he said, would be to exempt family-owned companies with a small number of shareholders.

Meanwhile, if the Court refuses to rule on the Oakland Scavenger case, the appellate court ruling -- in favor of the employees -- would stand. That ruling would hold sway in California, Washington, and Oregon, and it would set a chilling example for the rest of the country.